8.05% NHAI InvIT NCD October 2022 – Should you invest?

National Highway Authority of India (NHAI) sponsored National Highways Infra Trust (NHAI InvIT) is offering 8.05% NHAI InvIT NCD October 2022 from 17th October to 7th November 2022. Features, Eligibility and who can invest in NHAI InvIT NCD?

The proposed issue has a base issue size of Rs.750 crores with an option to retain oversubscription up to Rs.750 crores, aggregating up to Rs.1,500 crores. The NCDs have been rated ‘CARE AAA/Stable’ by CARE Ratings Limited and ‘IND AAA/Stable by India Ratings and Research Private Limited.

Let us first understand the basics of NCDs.

What are debentures?

Debentures are nothing but you are lending the money to the company. In return, the company is promising you the interest rate and return of principal at the specified time period. Then what is the difference between debentures and bonds?

In the case of India, the difference between bonds and debentures are same. However, there are slight differences only the reasons for which companies borrow money from us (investors). Usually, bonds are meant for long-term company borrowing. However, debentures are meant for meeting short-term company requirements.

Types of Debentures

Let us now understand the different variants of debentures.

Convertible and Non-Convertible Debentures

Convertible debentures mean after the specified time, these debentures are converted into shares (stocks) of the company. Up to that conversation, you will enjoy the fixed specified coupon (interest rate) on such debentures. After that, your earnings depend on the price appreciation of the stock or the dividend income you receive (if the company declares it).

Non-Convertible Debentures, on the other hand, will never be converted into shares (stocks) of the company. Investors who invest in such non-convertible debentures will enjoy a fixed interest rate up to maturity and after that return of principal (exactly like Bank FDs).

Secured and Unsecured Debentures

Now within debentures, there is one category like secured and unsecured debentures. Secured debentures mean companies while borrowing money from you usually along with a promise to repay the interest and principal timely, put up some asset (such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders) as surety for the loan.

Secured means in case of the company goes bankrupt or goes something wrong, the company will sell such assets and repay you the money. Hence, secured debentures are usually safer than unsecured.

In the case of unsecured debentures, if the company goes bankrupt, then you will get the money when all such secured debtors’ amount is paid back. Hence, unsecured debentures are riskier than secured, and also because of such risk they offer a higher interest rate to you than the secured.

Call and Put Option in Debentures

There is one more variant in the case of debentures and they are usually called as Call or Put Option Debentures.

A CALL option means the company has an option to ask the investor to surrender the debenture after a certain period to them. In such a situation, the company will pay back the principal to you.

Usually, companies exercise this option if interest rates go down, and the company can get funds at lower rates from the market. In such a situation, instead of paying you a higher interest rate, companies can exercise this call option and go for a cheaper loan.

On the other hand, a PUT option means that the investor has an option to surrender the debenture if he wants to, and get back his principal.

Suppose if interest rates go up and what you are receiving from your debenture is offering you lesser interest, then you can exercise this option and get back your money to invest somewhere else. A put option gives a lot of flexibility to the investor – if interest rates go up, and he can get better rates from the market.

Do remember that such CALL and PUT options are available to investors after holding the debentures for certain periods. Also, companies give you a time period to accept or exercise such options and within that period you have to exercise it.

Taxation of NCD (Non-Convertible Debentures)

# Interest Income

The taxability of interest on NCD will depend on the method of accounting you follow for recognizing your income.

If you are following the cash method of accounting, interest will be taxable as and when the interest is received.

However, under the mercantile method of accounting, interest income on NCD will be taxable as and when interest is accrued and due.

Hence, interest income is treated as “Income from Other Sources” and treated accordingly.

# Short-Term Capital Gain

If you held the debentures for less than a year and sold it in the secondary market, then any such gain from this selling will be taxed according to your tax slab.

# Long-Term Capital Gain

If you hold the listed NCD, (cumulative or annual interest payment), for a period of one year or more, and on selling such NCD if you earn the gain, then the such gain will be long-term capital gains (LTCG) chargeable to tax at 10% without indexation benefit.

NCD (Non-Convertible Debentures) – Who can invest?

Many of us blindly invest with the lure of high returns from such debentures. As I told you earlier, currently few NCDs are offering you high-interest rates than banks.

Advantages of NCD (Non-Convertible Debentures)

  • These are good if you are looking for a constant stream of income. Do remember that few NCDs offer you to return interest and principal at maturity itself. Hence, in such a situation, they act like typical FDs for you.
  • Usually offers higher interest rates than Bank FDs.
  • These NCDs are listed on stock exchanges. Hence, in the case of liquidity, you can sell it in the secondary market.
  • Interest will be directly credited to your bank account. Hence, the ease of managing money.
  • There will not be TDS (Tax Deducted at Source) for these NCDs if you held them in Demat format. Hence, in this feature, they have an edge over Bank FDs.
  • It will give you diversification to your debt portfolio.

Disadvantages of NCD (Non-Convertible Debentures)

  • Credit Rating-Never trust the current credit rating and jump into investing. Credit rating may change at any point of time based on the company’s financials. Hence, beware of credit rating.
  • Liquidity-Even though such NCDs are listed in the secondary market (like BSE or NSE), they are very thinly traded. Hence, you may face a liquidity issue.
  • Post Tax Returns-Always check for post-tax returns on the interest you will receive. The formula to calculate the same is given below. Hence, a 9% NCD may not be the same for 10%, 20% or 30% tax slab individuals.

Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

  • Why a company needs the money-Check why they need the money. Why they are offering you higher interest rates than Bank FDs? If it is not possible to gauge the same by you, then knock on the experts’ door and then only invest.
  • HIGH RETURNS MEANS HIGH RISK-As I said above, if they are offering you the highest interest rate than Bank FDs, then there is always a risk involved. Mere SECURED DEBENTURES means not fully secure that you will get the money the next day after the company goes bankrupt.
  • Check Financial Statement-Check financial statement of the company for the like how much % of their total asset the company allocates for unsecured loans, Capital Adequacy Ratio (CAR), how much % of their total asset is set aside for the NPAs (non-performing assets), and like interest coverage ratio.

8.05% NHAI InvIT NCD October 2022 Features

The minimum investment amount has been kept low at Rs.10,000 so that the common man can participate in it. With that in mind, 25% of the NCD issue is reserved for retail investors. Do remember that the 8.05% NHAI InvIT NCD October 2022 is not guaranteed by the government or NHAI, it carries an AAA rating from two rating agencies.

Allotment will be based on a First Come First Service basis. These NCDs don’t have PUT and CALL options. Hence, in middle neither NHAI NHAI InvIT can call back the NCDs nor do you have an option to sell it back to it. However, they can be traded in the secondary market. Selling and buying prices will be based on demand and supply.

Subscription Dates17th October to 7th November 2022
Security TypeSecured, Redeemable, Non-Convertible Debentures
Face ValueRs.1,000 per NCD
Issue PriceRs.1,000 per NCD
Issue Size (Base)Rs.750 crore
Overall Issue Size (including oversubscription)Rs.1,500 crore
Minimum Lot size10 NCDs
Market Lot1 NCD
Tenor13 years
18 years
25 years
Credit RatingCARE AAA/Stable (Provisional)
India Ratings AAA/Stable (Provisional)
Category ReservationCategory 1 (QIB): 25%
Category 2 (NII): 25%
Category 3 (HNI): 25%
Category 4 (Retail): 25%
Basis of AllotmentFirst Come First Serve
Listing OnNSE, BSE

8.05% NHAI InvIT NCD October 2022 Coupon Rates

The coupon rate is 7.90% and as the interest rate is payable on a half-yearly basis, the effective yield will be 8.05%.

OptionTenureInterest PaymentCoupon RateEffective YieldMaturity Amount
Series 113 yearsSemi-annually7.90%8.05%INR1,000
Series 218 yearsSemi-annually7.90%8.05%INR1,000
Series 325 yearsSemi-annually7.90%8.05%INR1,000

8.05% NHAI InvIT NCD October 2022 – Should you invest?

Let us now discuss on the main topic of this post. Whether one should blindly invest in this 8.05% NHAI InvIT NCD in October 2022?

# Don’t be in wrong notion that as it is backed by the National Highway Authority Of India, Government is a guarantor for this. It is clearly communicated by Union Road Transport and Highways Minister Nitin Gadkari that the NCDs are not guaranteed by the government.

# This is a wonderful opportunity for those who are looking for a constant stream of income for the next 13 years to 25 years as the effective interest rate is 8.05%. Mainly because the current yield of Government Of India Bonds yield to maturity (as of 13th October 2022) is as below. However, this NCD offers you a coupon of 7.9% and the effective yield will be 8.05%.

Govt Bond Yields 2022

# However, just because it is offering a higher coupon rate does not mean all can jump into investment. As I mentioned above, this is best suitable for those who are looking for a constant stream of income but in an accumulation phase of life.

# As I mentioned above, interest income is taxable. Hence, always think of post-tax returns rather than plain offerings.

# As these are long-term NCDs and there are no PUT and CALL options during the tenure, if you wish the money, then you have no option but to sell in the secondary market at the prevailing price and liquidity.

Apart from these issues, I don’t feel any issues are there with respect to this NCD. Hence, if someone is really looking for a long-term constant stream of income for the next 13 years to 25 years, then they can go ahead.

8 thoughts on “8.05% NHAI InvIT NCD October 2022 – Should you invest?”

  1. Greetings, Sir. It is difficult for me to locate the specific reference in which these bonds are not implicitly or explicitly backed. I would appreciate it if you highlighted that part. Did Nitin Gadkari make a verbal declaration or did the press release state it. Please highlight that part sir.

    1. Dear KB,
      Refer the lines mentioned in that PIB notification “While the NCDs are not guaranteed by the government or NHAI, it carries AAA rating from two rating agencies”. I have shared the link of that notification in the above post. You can refer the same.

  2. National Highway Infra Trust is sponsored and fully owned by NHAI and therefore should we not assume an indirect responsibility of NHAI to be the issuer of these bonds.
    Practically speaking, in the event of a default, would the sponsorer not support and bail out NH Infra Trust. Is it not similar to AT1 bonds issued by any PSU bank. Would the GoI not bail out the bank for defaulting on its obligation – in fact GoI has been doing it for the last 20 years by ‘recapitalizing’ the PSU bank every now and then.

    1. Dear Kamal,
      Check yesterday’s press release of the Government. Where the minister clearly mentioned that NHAI is not a GUARANTOR and hence the ratings are allowed. Otherwise, they might have mentioned it as SOVEREIGN GUARANTEE.

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